articles on covered call options

[adios]

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DesertCat,

You make it sound like there is no place for covered calls, that a stock is either good or bad. If bad then don't buy the stock, if good then don't sell the covered call.

Ignoring taxes, what if you buy a company only because you think it is underpriced? You don't buy it because you think the business has any outstanding potential, but merely because you look at the company's assets and you think the stock price is low compared to that. You buy it only because it shouldn't go down. Then both your short at the strike price as well as your long-term holding is justified.

(I rarely write calls because most of my picks don't fall into this category. I also agree with your underlying premise that if you are selling a call you are selling a call, and the value of that call is separate from your stock purchase)

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I don't agree with Desert Cat about how he reads the "tea leaves" all the time but he's a smart guy. He's totally right IMO regarding the value in writing covered calls i.e. it's a poor idea. If you must do it I'd recommend shorting puts instead. Same risk profile, same EV, less transaction costs, and less capital tied up. Really though, I'd strongly recommend not doing it FWIW.

[DesertCat]

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For the long term investor you are losing upside a while lowering variance

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Not neccessarily, there are plenty of uses and strategies for longer terms but you are closed minded enough that I'm willing to drop this conversation completely.

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If you have something to add to the conversation, by all means go ahead. I'm not close minded so you don't have to take your (base)ball and just go home. Our conversation has been so far

Me: covered calls didn't work out so well in August for APPL holders.

You: They made $9!

Me: Buy and holders would have made more.

You: OMG how dare you point that out. I know so much more than you but instead of educating everyone I'm just going to stamp my feet and go away!

Sounds silly doesn't it? So lets start over, what have I missed? How do covered calls generate excess after tax returns over just buying and holding the stock for long term investors?

[skindog]

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do covered calls generate excess after tax returns over just buying and holding the stock for long term investors?

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I'm gonna get back in on this

I don't think bringing up specific examples does anything to bring the discussion one way or another. I can find a mountainload of cases where writing a covered call resulted in more profit than either buying the stock by itself or writing a call by itself.

Personally, I do it for stocks that I am bullish on (I wouldn't want to hold stocks just for covered call writing) if I feel both that the option provides a good reward and that the stock's raw 'volatility' isn't a good representation of whether the stock will reach a certain level. It is definitely more of a trading thing than an investment thing.

Just because I'm bullish on the stocks I buy, I might be hesitant to write something like the AAPL 125 call. Yes, you get a lot of cash for your time value, but like you pointed out - it's for a reason. In my covered call writing I leave enough room such that if the stock spikes and does hit the strike price, I will be very happy with my stock returns for the month. In all cases, I use it as something of a bonus return for my investment rather than an end-all strategy.

Like I said, I have a feeling that properly used, under specific circumstances that certain stocks face, covered call writing might bring abnormal returns. I don't write covered calls for every stock I own.

I can tell you definitively that I've made more money using covered calls than if I had not used them.. but that obviously doesn't prove anything with my short investing timeframe.

I think the most useful way of proving any point would be for either side to bring some articles or sources to the table.

[mrbaseball]

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Me: Buy and holders would have made more

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No. Option seller could have bought it back at 127 and been $2 ahead of the buy and holders.

[DesertCat]

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Me: Buy and holders would have made more

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No. Option seller could have bought it back at 127 and been $2 ahead of the buy and holders.

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If covered calls are so lucrative, why not sell the calls naked? All of the profits without tying up as much capital. If the stock closes over the call price you just buy at market and take a small loss. A small loss because stocks that pay big premiums never go up much, right?

[mrbaseball]

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If covered calls are so lucrative, why not sell the calls naked?

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Some do but as we all know it can be risky. But if I own a stock and have a target where I would like to sell it then why not write the call and (possibly) get some extra return? And if I see an opportunity for something I like (to own) with limited downside (in my mind) and I can buy it and write the call knowing that if I get excersized I made a reasoanble return and in fact my goal why not write the call? And if I can sell calls far enough out where I would be very happy to be called away then why not write the call? And if I want to sell a stock why not write a deep instead and get more return?

All depends on your goal and expectaion.

[Jcrew]

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Some do but as we all know it can be risky. But if I own a stock and have a target where I would like to sell it then why not write the call and (possibly) get some extra return? And if I see an opportunity for something I like (to own) with limited downside (in my mind) and I can buy it and write the call knowing that if I get excersized I made a reasoanble return and in fact my goal why not write the call? And if I can sell calls far enough out where I would be very happy to be called away then why not write the call? And if I want to sell a stock why not write a deep instead and get more return?

All depends on your goal and expectaion.

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Although I completely agree with mrbaseball and everything he has written in this thread, all but one of the stocks I was writing calls against in the past few years blew through the OTM strike price making substantially less money than the buy and hold strategy would have. The money left on the table does cause some mental pain even though the returns are still substantial.

[RicoTubbs]

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But if I own a stock and have a target where I would like to sell it then why not write the call and (possibly) get some extra return?

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Suppose that you own a stock that trades at $X but you do not want to sell it lower than $Y.

If $X>=$Y, then sell it.

If $X<$Y, you view the stock is undervalued. Correspondingly, a call on the stock will be undervalued as well and you should not sell the call. The price of the call is dictated by the price of the stock, so if the market is undervaluing the stock, it will also be undervaluing the call (unless you have some very specific beliefs about the return distribution).

And I'll anticipate a response: It doesn't matter that you're selling a call with a strike price of $Z, which is greater than $Y - that call will still be underpriced and you should not be selling it if you believe the underlying stock is underpriced.

[mrbaseball]

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The price of the call is dictated by the price of the stock

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And many other factors. The VIX (volatility index) was up approximately 2.5 points today. This has a tremendous effect on the price of options regardless of the price of the stock. I don't like selling options in a low volatiltiy environment but right now if there is a stock you like the options are likely higher priced today than they were yesterday meaning a covered call or naked short put could be appealing if you are looking to get long.

[Jimbo]

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And I'll anticipate a response: It doesn't matter that you're selling a call with a strike price of $Z, which is greater than $Y - that call will still be underpriced and you should not be selling it if you believe the underlying stock is underpriced.


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I'll stipulate that this is true the instant you sell the call. But every moment that passes the option becomes less undervalued. Unless you anticipated a rapid upward movement in the stock this is not a good reason not to sell covered calls. If you had anticipated such a rapid rise you wouldn't be selling a covered call in the first place so I must disagree with your post.

Jimbo